Friday, June 05, 2020

The bill for extreme wealth/income inequality is now overdue, and the penalties for ignoring the bill will be as extreme as the inequality.

Our socio-economic-political system--let's call it the status quo--has been hollowed out by extremes of wealth/power inequality driven by financialization and globalization, which have enriched the top 5% and left everyone else behind.

As a result, the status quo has become increasingly fragile and brittle even as cheerleaders claim everything's never been better--witness today's massive rally in stocks on a jobs report which suggests the V-shaped recovery is already well underway.

The fly in the ointment is even a V-shaped recovery won't repair the structural distortions which have generated levels of social stratification that are inherently destabilizing.

One way to understand this is: the bill for extreme wealth/income inequality is now overdue, and the penalties for ignoring the bill will be as extreme as the inequality.

An uneasy set of orthodoxies has masked the financial and social stratification that has widened as the wealthy have pulled away from the bottom 95% and hardened as the ladders of social mobility have decayed.

One orthodoxy is that multiple university degrees are a surefire ticket to secure, well-paying careers. Outside of a few specialties, this orthodoxy has foundered on a global over-supply of university credentials and a scarcity of secure, well-paying jobs.

Whatever jobs do pay well trace back to financialization, globalization or moated bastions of privilege and power that protect insiders from competition, accountability and transparency.

Another orthodoxy is that "anyone can get rich in America," a.k.a. we're all just one YouTube channel / influencer contract away from becoming rich. That such ephemeral success is now the bright beacon (apparently replacing flipping houses as real estate has stagnated) speaks to just how rickety the social mobility ladder has become: most of the rungs have rotted away.

The ultimate orthodoxy is that growth is infinite with the implication being the tide of expansion is lifting all boats, and so the system is working for everyone.

Now that the tide is ebbing, that mask has been ripped away. A great many people feel that they did all the right (i.e. mainstream) things and are working hard but their financial and social status remains precariously dependent not just on the expansion continuing forver but on their ability to borrow more money increasing as well.

An unstated corollary of infinite growth is that the wealth effect will also expand forever, too, so all you need to do to get rich is buy a house or two and buy stocks and then sit back and watch them increase in value.

A V-shaped recovery doesn't change the financial-social stratification. Rather, the stratification will increase and harden, leaving fewer options to move up the ladder and greasing the slide down to lower levels of security, safety, wealth and income.

Even the wealthy class (top 5%) will further stratify as those with high employment and capital mobility can move their households and capital to safer, lower-tax regions.

The immobile top 5% will be corralled by cash-starved municipalities as the tax donkeys who must pony up higher taxes for the privilege of living in cities and suburbs which will become less secure and less entertaining even if the much-anticipated V-shaped recovery occurs.

The top 5% tax donkeys will be expected to pay much higher taxes even as the wealth effect that generated the 30-year boom since 1990 flips into the reverse wealth effect as extremes of over-valuation revert to the mean.

The bottom 95% will also stratify into the mobile few and the immobile many. By mobile I don't just mean the freedom to move to another locale (because you work remotely) or move your capital around--I mean the mobility to move into a new field of endeavor, or move up into a a higher level of financial and physical security.

Those with fewer options to change their circumstances are increasingly frustrated, as the status quo grinds on, further enriching the few while the social-mobility ladders for everyone left behind continue crumbling.

This frustration manifests in a number of ways, from public protests and riots to under-the-radar opting out, an option I discussed in Opting Out, American Style (May 22, 2020).

As I've often noted here, the gap between high expectations and reality is a reliable source of social and political disorder. If everyone with low social and financial mobility is resigned to their poor prospects even as the wealthy class revels in its "natural" superiority, society can remain stable despite the widening gap between the few and the many.

But if the multitudes with poor prospects harbor high expectations, being stuck in a highly stratified economy and society will eventually ignite a revolt and systemic disorder as the elites defend their position and demand the multitudes accept their low mobility and status as "the natural order" that should not be disrupted.

As the orthodoxies of social mobility fail and stratifications harden, the high expectations built into America's social-mobility orthodoxies erupt as revolt and disorder. As noted above, the bill for extreme wealth/income inequality has now come due, and the price for ignoring the social stratifications created by inequality will be as high as the inequality itself.

Every one of these is a manifestation of institutional failure. The Gulfs Between the Classes (see chart of soaring inequality below) manifests a completely broken economic and social order, and the abject failure of core institutions (for example, the source of wealth inequality, the Federal Reserve).

The Gulfs Between the Classes also reflects our pay-to-play political system, in which wealth buys political power and everyone else gets to watch a pantomime of democracy.

Government agencies widen The Credibility Gap with bogus, rigged statistics and complexity thickets ("We have to pass the bill so that you can find out what is in it.") designed to make accountability and transparency effectively impossible.

The Partnerships That Failed include the alliances of various warring elites and the pantomime partnerships of elites and constituencies ("We pretend to obey and you pretend to listen to us.")

The Groups That Opted Out are as yet largely invisible because all the small business owners who closed down and stopped being Tax Donkeys are under the radar, and all the debt-serfs who have renounced their debts are carefully hidden by the appropriate bureaucracies, lest the enormity of the debt-serf opt-outs becomes visible.

The Groups That Opted Out include those who have lost trust in the corporate media, the government's statistical claims and the leadership of failing institutions.

When institutions have lost public trust and thus their legitimacy, the solution is fragmentation and decentralization so the unit size is reduced to the point where accountability and transparency can be enforced by the citizenry and/or members.

Management author Peter Drucker (Post-Capitalist Society) noted that in the transition to a post-capital economy, legacy institutions in everything from higher education to healthcare are the wrong unit size, meaning that they are too large to be effective, accountable and transparent, as their sheer mass encourages processes and thickets insiders can use to avoid accountability and transparency.

When fiat currencies fail, fragmentation and competition between transparently priced currencies will be the solution. The ideal solution is a spectrum of currencies ranging from bitcoin and other mined cryptocurrencies to privately issued gold-backed currencies, state-issued gold-backed currencies, local currencies intended for use in local economies, and my proposed labor-backed currency which I outlined in my book A Radically Beneficial World.

That which has failed is unsustainable, no matter how many trillions the Federal Reserve tosses against the tides of history. The current travesty of a mockery of a sham system will fragment no matter how desperate the looters, parasites and predators are to maintain their swag.

Tuesday, June 02, 2020

As the old models break down, opportunities for new models will arise.

Unstable, unsustainable systems can lull observers into a comfy complacency as instability increases beneath a thin veneer of apparent stability.

That's the systemic story of the past 20 years: all the extremes that were needed to maintain the veneer of stability have increased the instability building beneath the complacent confidence.

But sadly for the status quo, all bubbles pop, all extremes revert to the mean and all that is unsustainable implodes as apparently linear systems (snow accumulating on a mountainside) suddenly go non-linear (avalanche).

The majority of the Pre-Pandemic Bubble Economy was unsustainable:

1. Bubbles in the stock market and housing-- unsustainable

2. Soaring debt: corporate, household and public-- unsustainable

3. College costs paid by trillions of dollars in student loan debt-- unsustainable

8. Over-supply and over-capacity for almost everything-- unsustainable

I could go on but you get the idea.

As I've been discussing in recent months, these unsustainable systems are tightly bound and incredibly fragile. Each is a row of dominoes that intersect with all the other rows, so one domino falling in any row will topple all the dominoes in every row.

Consider just one unsustainable sector: commercial real estate. Thanks to decades of overbuilding caused by the Federal Reserve's super-low interest rates, there is too much commercial space in the U.S.: too much retail space, too much office space, too much self-storage, etc. There are also too many new buildings on soon-to-be empty college campuses and too many hotels, etc.

The decimation of retailers has been underway for the past four years. The chart below is from 2017, and the store closures have only accelerated.

The U.S. has between 8 and 10 times more retail space than other developed economies. That suggests 50% or more of all the commercial retail space in America is superfluous.

The demand for commercial space is crashing, and nose-bleed valuations are under pressure. This charts shows that valuations could fall in half--and that wouldn't necessarily rebalance supply and demand.

All the trillions of dollars in debt piled on over-valued CRE is at risk of default. That alone will trigger a widening financial crisis as the dominoes fall.

As Richard Bonugli and I discuss in our recent podcast on "the new normal," as the old models break down opportunities for new models will arise. For example, the entire education complex based on the outdated, dysfunctional "factory model" of large campuses and hundreds or thousands of students packed together is ripe for disruption.

Why not have small decentralized classes without the bloated administration and centralized curriculum--not to mention the improved security of small, decentralized groups? In my book The Nearly Free University I describe how small, decentralized "apprenticeship" groups could improve actual learning while eliminating the entire bloated administration and campus costs (lab work could be performed onsite in existing work places).

Rather than accredit the institution, accredit the student.

The unsustainably costly healthcare sector is equally ripe for disruption as demand destruction and soaring costs undermine the current model of profiteering.

Decentralizing the economy sacrifices the long global supply chains and corporate monopolies for local jobs and local supply chains. All the corporate and state monopolies and cartels that have hollowed out the economy and the social order were exploitive, parasitic and predatory as well as unsustainable, and their slide into the dustbin of history is accelerating as linear systems cascade into non-linear dynamics.

The post-Covid economy will be very different from the pre-pandemic bubble economy, in ways few anticipate: non-linear creative destruction and DeGrowth will be the dominant dynamics. Models that obsolete the old, unsustainable, dysfunctional models will blossom, and that is how civilization advances.

Maybe "shareholder value" has been the greatest con in history, a PR cover story for the greatest rise in wealth and power inequality in American history.

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